Good day ladies and gentlemen and welcome to the second quarter 2009 Nektar Therapeutics Earnings Call. My name is (Novalia) and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference Ms. Jennifer Ruddock, Senior Director of Investor Relations. Please proceed.

Thank you. Good afternoon and thank you for joining us for Nektar Therapeutics second quarter 2009 financial results conference call. With us today are Howard Robin, our President and CEO, John Nicholson, our Chief Financial Officer, Bharatt Chowrira, our Chief Operating Officer, Dr. Randall Moreadith, our Chief Drug Development Officer, and Dr. Lorianne Masuoka, our Chief Medical Officer. Before we get started please note that the following presentation contains forward-looking statements that reflects our current views as to the Company's business strategy, the prospects and timing of potential new collaboration partnerships, the value and potential of our technology platform, the clinical and commercial prospects of our proprietary and partnered products. Our financial guidance for 2009 and other future events relating to the Company. These forward-looking statements involve uncertainties and other risks that are detailed in Nektar's report and other filings with the SEC, including our Form 10-K Annual Report filed with the SEC on March 6, 2009. Our most recent Form 10-Q quarterly report and the report on Form 8-K filed today. Actual events could differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, future events or development. A webcast of this conference call will be available for replay on the Investor Relations page of Nektar's website at www.nektar.com. With that, I'd like to hand the call over to Howard. Howard?

Thank you, Jennifer and thanks to everyone for joining us today. Nektar continues to make excellent progress, advancing our clinical pipeline and executing on our 2009 objectives. This year is an important year for Nektar, because we are seeing the positive results from our transformation to a drug development Company with an impressive pipeline of near, mid and longer-term opportunities. In 2009 we made a strong commitment to building an advanced clinical pipeline at Nektar with a planned investment of $60 million into clinical developments. And across the board our clinical stage programs are proceeding on track. We've completed our Phase 2 program for Nektar 118 and by year end, we plan to report preliminary results from our ongoing phase 2 studies for Nektar 102 in ovarian cancer and breast cancer In addition to results from our Phase 1 study of Nektar 105 in solid tumors. Today, I want to update you on the continued progress of our proprietary clinical pipeline, which I believe is one of the most promising in biotech. I will start with our most advanced proprietary product Nektar 118. Nektar 118 is an orally peripheral acting opioid antagonist in development to treat opioid induced constipation. The results from our Phase 2, randomized placebo controlled double blind study demonstrates that oral Nektar 118 effectively reverses opioid induced constipation without interfering with the desired CNS analgesic effects of opioid. Nektar 118 demonstrates how Nektar’s advanced polymer conjugate technology is being used to inhibit small molecule drugs from entering the brain to prevent unwanted CNS effects and to achieve a targeted effect in a specific perhiparal organ. Nektar 118 is also an excellent example of how our technology can turn an injectible drug into an orally bio available drug dramatically increasing its market potentials. Final results from the Phase…

Thank you, Howard and good afternoon everyone. We have significantly reduced our operating costs and expenses in the second quarter in the first half of this year as compared to a year-ago. Total operating costs and expenses were down 19% to $43.5 million in the second quarter of 2009, compared to $53.8 million in the second quarter of 2008. For the first half of 2009, total operating costs and expenses were down 28% to $83.5 million as compared to $115.6 million in the first half of 2008. Our net loss in the second quarter of 2009, declined as well to $32.1 million versus a loss of $33.4 million in the second quarter of 2008. We still expect 2009 revenues to be in the range of $65 million to $75 million. Included in our revenue and cash projections is a forecasted exercise of $31 million license option extension, which is expected to occur in the fourth quarter. Our cash guidance for 2009 remains unchanged. We expect to end the year with $275 million. As a reminder, we do not expect the quarterly cash usage trend to continue for the remaining two quarter, as our revenue and cash receipts will be more heavily weighted in the second half of the year. Importantly our year-end cash and investment projection of $275 million, does not include potential payments from any new partnerships. We anticipate our cash used in operations to be approximately $80 million. As Howard mentioned at the beginning of the call, that amount reflects a substantial investment of approximately $60 million in to clinical programs this year and $8 million in to preclinical programs. As you can clearly see, we have significantly reduced our operating costs and expenses, while building an advanced stage clinical pipeline. Capital expenditures and other expenses still expected to be approximately $20 million to $25 million, which includes the Novartis closing costs of $4 million. Much of this capital outlays represents an investment into our new 90,000 square foot R&D facility in India opening in the fourth quarter of 2009. This facility will greatly expand the Company's in-house research and preclinical development capability, including our ability to do our own biolytical analysis, analytical development and in-house biology. This investment will enable us to greatly increase our efficiency and significantly reduce future external R&D expenses. With that, I would now like to turn to open the call to questions. Operator?

(Operator Instructions). Your first question comes from the line of Jonathan Aschoff with Brean Murray.

Hi guys. I was wondering if you could shed light actually on another company. Namely why would Savient alter the manufacturing process between the manufacturing of clinical trial material. And it's being your late submission. Basically I was wondering why they would change the amount of PEG? I mean, did they have like variability issues that prompted such a last minute change?

Jonathan I'm going to let Bharatt Chowrira our Chief Operating Officer handle that question.

Thanks, Jonathan. We don't quite know the details, obviously, regarding the decision making process at Savient regarding the manufacturing processes, but all I can comment on is that we have had significant experience in manufacturing PEGylation and PEGylated protein products for a number of our partners. We have nine products in the market, as you know that our PEGylated proteins that use Nektar technology and we have built this expertise over a number of years. And it's not trivial, as you can imagine to go from a research scale or a clinical scale of PEGylation to a commercial scale of manufacturing. So, there is a lot of know-how and expertise that goes into that. So, we have a good track record on that. So, not sure exactly what happened with Savient, but I can tell you that Nektar is one of the leaders in this area of making PEGylated proteins and we have the expertise to do that.

Thanks, Bharatt. I was wondering if I could ask something about, Nektar 118. basically as it relates to Sucampo were your potential partners for 118, the ones you are quite down the road with. Did they really think that Sucampo was much of a competitor and they were maybe holding out for that Phase 3 result or was it really (inaudible) thought, was kind of a foregone conclusion?

Well, look I mean these drugs work by very, very different mechanisms. And as I said earlier, we are dealing directly with the issues that cause opioid induced constipation. The effect of the opioid paralyzing the bowel. Now the Sucampo product causes a lot more fluid that collects in the bowel and that might have some benefit, but that's a very, very different mechanism and it's sort of a secondary approach to dealing with the problem. Our approach with Nektar 118 is to antagonize the morphine and restore normal bowel movements and I think that's the significant difference here and I think the partners greatly appreciate that.

Okay, thanks a lot.

Your next question comes from the line of Rich Silver with Barclays Capital.

Yeah, you still expecting a partnership deal by the end of the year? Yes? Correct?

Yes , I said that is correct.

Okay. Sorry. And just a few pipeline questions. You mentioned that 061, the Bayer's trial will begin in the first quarter of 2010. I guess previously we expected it in the second quarter. Can you elaborate on what's behind the delay?

Yeah I think look, you can take two different approaches towards starting a clinical trial. One is to have the final product, the final device designed and manufactured or you can take some more of a risk and start your trial early and do the finalization of the device in parallel with the clinical process. Bayer correctly made a decision to wait until we had finalized the device, made sure that it could be scaled up and it was manufactured in a cost-effective manner and that it could be made consistently and they chose to have those devices manufactured and put into inventory before they started the clinical trial. And I think that was a wise decision and we are moving towards that. I have every belief that we will have sufficient devices manufactured. And these are final devices you just scaled up, they are cost effective, they are cost efficient. We'll have those devices made for bio to start in the first quarter of next year.

Okay. And just, couple of other P&L questions. SG&A and R&D guidance, is that also unchanged for the year?

That's correct. We're still staying with R&D of about 100 million and G&A somewhere in the $45 million range.

Okay. And in terms of cost to goods in the second quarter, it seemed a little bit high, any explanation for that?

Yeah, basically what it came down to is we had lower production volumes this year than we did last year. And with that, obviously, you have unabsorbed manufacturing overhead that gets put into the course of fewer products that been made. And the other issue is our product mix changed little bit differently than it was this year versus last year.

And what about on a go-forward basis?

On a going-forward basis, we would expect our gross margins probably to be closer to, I'm just talking about product sales now. Gross margins to be basically closer to where it was in the second quarter of this year.

Where it was in the first quarter or the second quarter?

Second quarter.

Okay. On 118, any pain conferences where you will be presenting Phase 2 data?

Yeah. We said that we would be presenting at the, I just want to give you the right date, so we make sure its clear. I have to go back to my notes for a moment. But we said, that we would presenting data on Nektar 118 at the American Academy of Pain Management Meeting on October 8th in Phoenix.

Okay. And the start on 102 in cervical cancer?

Well, we are ready to proceed, we are ready to enroll sites, however we've made a decision that we want to see the results in our Phase 2 preliminary results in ovarian and breast before we start that study. There is also a limit to how much a small Company can pursue at one point in time.

Okay and then on 119, you said that you were preparing for Phase 2 proof of concept study. When would that begin?

Well we haven't said the exact date yet. And of course that will likely be a function of what the partnering collaboration looks like. Because Nektar 118 and 119 will likely be partnered with the same company and I think they'll have to have some significant input into exactly when we start that study.

Okay. And just clarification, sorry, again on the R&D and G&A guidance. We thought that previously it was 125 to 135 for R&D and G&A was 50 to 55 and now you're saying 100 for R&D and 45 for G&A?

Yes, that's correct. The reason for that is from our standpoint because we're trying to come in with our cash guidance of $235 million obviously there is certain things that we thought we were going to be able to do this year that were you know, from a financial discipline standpoint we have to postpone.

So that it was reduced?

Yes.

Okay, thanks.

Your next question comes from the line of Mona Ashiya with JPMorgan.

Hi, guys. Calling in for Cory. Couple of questions, Howard Did I hear you say that you wouldn't start the 119 trial without a partner?

No. What I said was at this point since we are in active discussions with companies, it makes no sense to start a trial before we consummated a relationship simply because you can imagine that partner would want to have a lot of input into the process of designing that trial. In the absence of a partnership, of course we would be starting Phase 3 trials on Nektar 118 and Phase 2 trials on Nektar 119. But at this point since we are in those discussions, there is no good reason to move into Phase 2 without the partner being an active participant.

Okay, got you. And then just on 102, I was wondering if you could same expectations for the results that we'll see later this year in ovarian and in breast. What sort of response rate would you be looking forward to make our go decision.

I'll ask Lorianne Masuoka our Chief Medical Office to answer that.

Thanks. The results that we'll be providing to you will be preliminary data from the ovarian and breast cancer trials, both of which are proceeding very well. And at this time, I can't release to you information specifically about the anticipated objective response rate. As you know, patients have to be on therapy for a minimum of a couple months, before you can tell if any individual is a responder, but we believe that we will have significant new information to share with you at the end of the year.

Okay. And then just a final question for Bharatt, just a housekeeping one. Just wondering what the key patents are or when the key patents for 102 and 105 expire?

Okay. So we have multiple families of patents for each of those products and they extend the life of the coverage for each of these products or in a period of a number of years. So we haven't publicly talked about what the expiration is for any one of those products. Needless to say, we have multiple layers of coverage, we have multiple aspects of each of those products that are covered by either issued or pending patent application. So, that's something that…

Can you provide like a ballpark estimate? Would it extend beyond 2020 or?

Yes. So on an average a lot of these patents were filed in the last three to five years and so you can imagine the coverage for each one of those patents is 20 years from the time you file. So, you can do the math for some of these patents. And we continue to file, on each of these products as in when we get new data and that with the aim of extending the coverage for each one of those products.

Okay, thanks.

Your next question is a follow-up question from the line of John Sonnier with William Blair.

Hi, it's John Sonnier. Thanks for taking the question and congrats on a lot of good progress over there. How are things for the additional granularity on the 118 trial? I just want to make sure I got that down right. Its in the 25 mega arm, did you say 75% responds to .003?

That is correct.

And 50 was 92% at .001.

The first one was .0003.

Thank you and that’s …

And at the 50 Meg it was 92% at .0001.

This is 28-day data but this is only four doses, is that correct?

Say that again, I'm sorry.

This was 28-day data was it only four doses?

Lorianne why don't you go through the specifics for…

For this study we had three dosing cohorts, 5, 25 and 50 milligrams. And each patient was dosed on a daily basis for 28 consecutive days.

That is just daily for 28 days.

That's right.

Okay. And then in the 119 study, do you think you need a similar structure in terms of the total number of doses to get your proof of concept? Do we envision a trial like this?

For the 119 study, this is going to be somewhat different than the 118 study. Because as you know, when we combine 118 with an opioid, we believe that not only will opioid induced bowel dysfunction be ameliorated, but it could potentially be prevented as well. So, the dosing duration may not be exactly the same as for a 118 program. And we'll certainly be able to release further information about this trial. As Howard mentioned as we crystallize the trial going forward with the partner.

So conceptually it'll be shorter, is that correct?

So in principle, if you're looking at the prevention of opioid induced constipation, you could potentially identify a pharmacological effect in a somewhat shorter period of time, that's right.

Okay. And then one final question there is a lot of excitement because of the work going on at Gilead with time of your sparing and pharmaco enhancing, when will you guys be in a position to disclose the base compound, which protease inhibitor you are working with? And when will obviously the proof of concept on that compound?

Look, we haven't said that yet, and we are still doing a number of preclinical models to make sure that we have the right candidate and the right composition to move into the IND stage. So, at this point, I can't project when that will be. I can assure you, as soon as we're ready to put that candidate forward through an IND file, we'll make sure everybody knows it.

Perfect, thanks a lot.

Your next question comes from the line of Ian Sanderson with Cowen and Company.

Good afternoon, thanks for taking the question. First maybe Howard could you give us, given that you've been talking to companies for quite some time on Nektar 118, what the push back has been there if any, and secondly, if there is progress made on the inhaled vancomycin program?

Okay. Well, first of all there make it easy. There has been no push back on Nektar 118 as a matter of fact I think everybody looks, every potential partner looks at 118 and sees enormous potential. I think the data that we have has been referred to as tremendous and exciting and I'm pretty pleased with the discussions we are having with numerous potential partners. So I stand by my position that I believe we will have a collaboration done this year and I believe this drug can be a billion dollar plus drug. With regard to vancomycin, we've moved away as you know from inhaled therapeutics in a very important way. Amikacin inhale is a great drug, it's partnered with Bayer and we think it will do very, very well. In the US we have a flat 30% royalty on inhaled Amikacin, so that can yield significant dollars for potential for Nektar. With regard to vancomycin the market is much smaller and we are examining the opportunities there, we are talking to various companies about how we might proceed there. But I don't know at this point that you'll see Nektar actually develop without a partner, of vancomycin or gram-positive antibiotic, but we'll see how it evolves. There are companies that are interested. There are possibilities. There is some novel opportunities with inhale vancomycin, but I must say that we are really focusing the Company on our polymer conjugate technology platform and not inhale therapeutics.

Okay. And just a follow-up on the balance sheet, I apologize I don't have it in front of me, but was there any additional repurchase of that notes during the quarter?

No, we have not done that this quarter.

Okay. Thank you.

Your next question is a follow up question from the line of Rich Silver with Barclays Capital.

Yeah, just back to the operating expenses again, so the roughly 38 million in reduced spending between 30ish SG&A and paid on R&D what accounts for that difference? What programs have been sort of pushed off or what on the G&A front are you looking at cutting back?

Yeah, it's, it's more along the lines of efficiency. So, from a standpoint of looking at the clinical programs we are doing, we are looking at things that we can do in house versus doing with third parties. We are also looking to utilize our resources in India to do some of the work for us. So it's more from a standpoint of how can we spend our money more efficiently versus terminating or forestalling any of the clinical programs we want to do.

Rich, this is Howard. I think you can see that our, our spending level has gone down and at the same time we greatly expanded our clinical and preclinical programs. So, I mean, as I said years ago, we're going to learn to do a lot more with less at Nektar and we are doing that. And there'll be variances from quarter-to-quarter. And it can't be that precise. But I can tell you via our efficiencies, via being wiser on how we spend money, being more cautious on how we spend money, I think we are moving the Company in the right direction. I mean the work that we moved to India alone, the kind of analytical analysis that we're putting in India alone has saved us millions and millions of dollars over going to outside laboratories. So, I think overall, we are also saving money for example because Nektar 118 completed early. I mean we finished the Phase 2 clinical studies early. We ended them early because of outstanding efficacy that we saw. And that saved some money of us. So, overall I think, it's really easy for a CEO to say, I'm going to cut costs and I'm going to cut programs. That's way too easy. Anybody can cut programs. Anybody could stop working on them. What we're doing at Nektar is we're being much more efficient. We're being very careful how we spend money. We're being very wise about how we spend money and we are getting a lot more done. And I think that's what you have to look at when you look at the results of Nektar.

Great. Is the second quarter a good indication of run rate going forward for both those line?

No it actually isn't. I think we said that earlier. If you straight line Nektar, you are going to come up with too high a spend. I mean the first two quarters were loaded. There was clinical study loading in the first two quarters. There was Phase 2 study. The second two quarters of the year will reflect probably less expensive and certainly some more revenues. So, the overall burn rate for the last two quarters will be less than the first two quarters. And that's why we said our overall operating, our operating cash spend will be about $80 million for the year and we will end the year with $275 million. If you straight line the first two quarters, you won't get there.

Okay, thanks very much.

(Operator Instructions). Your next question comes from the line of Chris Richard with Merlin Nexus.

Hello, thank you for taking my call. Howard if you could just remind us what a major, the definition of what a major response is in the 118 study?

That's an excellent question, and I'm going to ask Lorianne Masuoka to take you through that. Go ahead.

Okay.

Great. Thanks for the question. That's right so at the beginning of the study. The study was designed to look at whether or not patients had a really clinically significant response. And so a responder was defined as somebody who essentially more than doubled their baseline frequency as bowel movements. So, in clinical trials, any time you have a 100% or 150% increase of anything from baseline this is considered really major really significant. So we said that to point out the fact that while a very impressive 75% to 92% of patients were classified as having this major degree of response. We believe that virtually everyone in the study has the ability to respond to Nektar 118. We just set the bar very high for how we defined the responder.

Okay. So a major responder in essence is anyone who has doubled the number of spontaneous bowel movements?

It's actually more than double, because on average the patient came in with 1.5 at baseline. And a responder had to have an increase of at least two. And of course, because we had an increase of more 3.5 overall, most of the patients did significantly better than that even.

Okay, great. Thank you.

At this moment, I'm showing there are no further questions in the queue. I'd like to hand the call back over to Management for closing remarks.

Well, thank you everyone for your questions and for joining us today. I think Nektar has made significant progress and our transformation to a drug development Company. And I wish to thank our employees again for their commitment, dedication to the Company. And I look forward to updating you on our continued progress in the months to come. Thanks for joining us today, bye-bye.

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.